Retirement and Investment Solutions Newsletter

2011 – ISSUE 2

J.P. Morgan testimony at March 1 Department of Labor hearing
Legislative and regulatory update: Retirement income a hot topic on "the Hill"
Test your retirement plan knowledge
Self-directed brokerage offers investment flexibility
Investing terms defined
Retirement readiness: Participants acknowledge it's important, but don't act
Steps to financial fitness
The move to improve

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Availability of products and services featured in Insights varies by plan. For details, contact your J.P. Morgan representative.

J.P. Morgan testimony at March 1 Department of Labor hearing

Karen Prange, with J.P. Morgan Chase & Co., testified recently at a two-day Department of Labor (DOL) hearing in Washington. Industry representatives met there to discuss the DOL’s proposed rule to redefine the term “fiduciary.” Here is an excerpt of Karen’s remarks; full content is linked below:

Good morning, I am Karen Prange, executive director and assistant general counsel for J.P. Morgan Chase and Co. I am here today representing our Retirement Plan Services and Worldwide Securities Services lines of business.

J.P. Morgan believes that the Proposed Regulations should be modified to eliminate unnecessary and subjective standards. Rather than determining whether a person is “impartial” or has “adverse” interests, the Proposed Regulations will better serve plan sponsors and participants by requiring objective, written disclosures from service providers regardless of whether or not they will be acting in a fiduciary capacity.

To enable plan sponsors and participants to continue receiving valuable services from providers, J.P. Morgan also believes the various limitations described in the Proposed Regulations should be expanded or clarified to clearly exclude non-discretionary administrative services and to clearly distinguish between the provision of information versus advice. Finally, we believe that existing standards governing plan distribution education and guidance are sufficient, and need not be modified in the final regulations. Download PDF to read more

Legislative and regulatory update: Retirement income a hot topic on "the Hill"

Retirement income remains a priority in Washington – specifically, helping plan participants translate their account balances into a lifetime income stream at retirement.

On February 2, we saw the reintroduction of the Lifetime Income Disclosure Act. The bill, cosponsored by Senators Jeff Bingaman (D-NM), Johnny Isakson (R-GA) and Herb Kohl (D-WI), would require 401(k) participants to receive a statement, at least annually, estimating monthly retirement income based on their current account balance and in a manner similar to Social Security annual statements. The bill would also charge the Department of Labor (DOL) to develop a model disclosure notice and provide plan sponsors and service providers with the assumptions to be used in converting the participant’s account balance into an annuity. It would require disclosing both single life and qualified-joint- and survivor-annuity equivalents.

Employers and service providers using the model disclosure and following the prescribed assumptions and DOL rules would be protected from liability that the income projection would be deemed a guarantee.

Income projection guidance
The DOL has also shown interest in providing guidance on retirement income projections. Last September, the DOL and the Department of the Treasury held two days of joint public hearings on retirement income, and one of the issues they focused on was how to provide participants with lifetime income projections and how those projections should be calculated. The DOL is planning to issue proposed regulations this summer on pension benefit statements, including statements for defined contribution plans. The proposed regulations will be issued pursuant to the requirement under the Pension Protection Act that the DOL provide a model benefit statement for sponsors. Early indications are that these regulations will also provide some level of guidance on retirement income projections.

Flexibility is key to future innovations
We applaud congressional and regulatory efforts to help participants better understand how their account balances translate into lifetime income streams. We have long advocated that this information is essential to helping participants prepare for a successful retirement. We are concerned, however, about unintended consequences that may stifle future innovation. We believe the way the Senate bill is currently written, retirement income projections would be based on the participant’s current balance without giving consideration to future earnings or contributions. This could limit the usefulness of the projection to younger workers just starting their retirement savings.

In addition, we believe projections are most effective when they allow participants to model the effect that changes, such as increasing contribution rates, may have on their income at retirement. We would hope that any legislation or regulation would give sponsors and providers the flexibility to continue to innovate and bring their best thinking to participants on this critical issue.

Test your retirement plan knowledge

Question: What vesting schedule applies when a plan with a 100% immediate vesting merges into a plan with a six-year graded vesting schedule? Answer below.

Self-directed brokerage offers investment flexibility

Investment flexibility is often a goal in the retirement program. A brokerage window, with its wide range of equities, mutual funds, options and fixed income securities, offers flexibility outside the core lineup – and can fill the need of the small – but potentially vocal group – of savvy-investor employees.

As of March 2011, 57% of our clients offer a self-directed brokerage account option to their participants. Here are some of the reasons why:

For participants …

open-architecture investment structure, including access to thousands of mutual funds
flexibility and control with convenience of online trading and investment research tools
access to financial advisors familiar with retirement plans, brokerage services and plan-specific provisions
simple and easy-to-use service

For sponsors …

investment flexibility for the small but potentially vocal group of savvy-investor employees
customization, either by imposing limits on how much participants may allocate, or by the types of investments available
automated brokerage breakout for Form 5500 reporting
expanded brokerage account reporting available on the Plan Sponsor Portal

To find out more about our self-directed brokerage account option and whether it is suitable for your plan, contact your J.P. Morgan representative.

Investing terms defined

Investing, like many specific areas of interest, has its own jargon. Without a basic knowledge of some of these terms, you can quickly find yourself lost or losing interest in a retirement plan lineup discussion that might otherwise be beneficial. Here’s a reminder of frequently used terms and how they are applied in the investing universe:

Alpha – the risk-adjusted excess return of a fund relative to its benchmark index. In more basic terms, it is the value a fund manager adds or detracts from a fund’s return. If the fund outperforms the benchmark by 1.0%, then its alpha is 1.0; likewise, if it underperforms the benchmark by 1.0%, then its alpha would be -1.0.

Beta – the measure of a fund’s volatility (or risk) compared to its benchmark. A beta of 1.20 would indicate a fund is 20% more volatile than its benchmark; likewise, a beta of .80 would indicate a fund is 20% less volatile than its benchmark.

Standard deviation – a way to measure the dispersion of a set of data from its average. In investing, this is applied to annual returns to measure volatility or risk. A fund with a higher standard deviation is likely to have more volatility in its annual returns.

Sharpe ratio – a calculation used to measure risk-adjusted performance. The calculation is made by taking the investment’s return minus a risk-free rate (think treasury securities), then divided by the standard deviation of the investment’s returns (think risk). The higher the Sharpe ratio, the more performance you are getting for the amount of risk taken.

With a basic understanding of key investing terms, conversations about the plan’s investment strategies don’t have to get derailed by unfamiliar jargon.

Retirement readiness: Participants acknowledge it's important, but don't act

When it comes to participants and retirement readiness, an overwhelming majority – 91% – acknowledge personal responsibility for their retirement readiness. That’s according to our 2010 nationwide survey of 401(k) participants. Far fewer participants, however, have taken the necessary steps to embrace that responsibility.

Lack of action on participants’ parts may be a result of not knowing how much is actually needed to fund a comfortable retirement. Our survey shows:

45% believe they need less than 75% of their current income in retirement; 16% don’t know what they need at all.
63% say they think they’ll personally replace less than 75% of their current income, while another 22% aren’t certain what they will be able to replace.
Those who identified a goal for retirement are more likely to feel confident in their ability to reach it.

The gap between acknowledgement and action illustrates the importance of strong plan design and communication programs to support retirement readiness. Applying elements of our Best Plans in America framework and employing the Audience of One^SM communication philosophy can benefit participants’ retirement outcomes. In looking at our participant data from March 2005 through December 2010, here’s what we find:

The number of eligible participants on track to replace at least 70% of their income in retirement increased by 18%.
The number of contributing participants on track to replace at least 70% increased by 75%.

Income replacement – a key metric to measure
Traditional measures such as participation, contribution rates and asset allocation are important defined contribution metrics, but they are only indicative of the ultimate metric – income replacement – which presents a full picture considering multiple sources of retirement income. That’s why, for the last 10 years, we have been helping participants gauge their retirement readiness by translating their accumulated assets into retirement income.

In our next issue, look for a link to our new white paper, Anything But Certain 2011, with the full findings of our nationwide survey.

Steps to financial fitness

We are pleased to introduce The Way Forward’s interactive presentation, “Steps to financial fitness.” Delivered onsite by a J.P. Morgan financial education consultant, this comprehensive educational seminar discusses steps your employees can take now to help them live comfortably through retirement.

The presentation is designed to provide an interesting, interactive and informative way for your employees to learn to:

Step up

determine their retirement income goal
find out where their money goes

Warm up

understand the barriers to saving
learn how to overcome them

Shape up

create a budget
pay down debt
increase 401(k) contributions

Change up

monitor progress
update their financial fitness routine periodically

Contact your communication strategist to learn more about the “Steps to financial fitness” presentation.

Test your retirement plan knowledge

Question: What vesting schedule applies when a plan with a 100% immediate vesting merges into a plan with a six-year graded vesting schedule?.

Answer: When plans are merged, the vesting schedule for the surviving plan is generally the applicable schedule. However, vesting rules require that a participant’s vesting percentage not be reduced due to an amendment of the vesting schedule. The merger of two plans could, in effect, be an amendment of the vesting schedule for those participants being merged into the surviving plan. The regulations state that a participant's vesting percentage in his or her accrued benefit must be determined without regard to the amendment if the amendment would reduce the vesting percentage. Therefore, all the participants in this merging plan must remain 100% vested in employer contributions.

The Internal Revenue Service has also stated that the protected vesting percentage at the time of the amendment (merger in this case) must not be reduced even with respect to benefits accrued after the amendment. (There can be several variations on this issue; each situation needs to be evaluated for the correct application of the vesting rules.)

From the previous issue of Insights – the answer to this question: "Can a non-Roth account in a 401(k) or 403(b) plan be rolled over to a Roth IRA?"

The move to improve

In February, we let you know about an upcoming move that will enhance our headquarters facilities in 2011. The new facility, just a few miles from the current Kansas City-area location, offers a convenient campus location, collaborative work environment and more advanced communication and meeting tools.

“The new facility offers our clients and employees the best of J.P. Morgan with a high-tech and high-touch environment for an overall first-class experience,” shares head of retirement strategic initiatives Pam Popp.

The facility will provide client visitors with a more transparent view into our Retirement Service Center – literally! Clients who visit will have a full view into the command center, which is home to the team responsible for participant phone call forecasting and service measurement.

“For all of our clients, the new facility will help reinforce the genuine care, quality service and cutting-edge creativity that our clients count on us to deliver,” states Kirk Isenhour, head of marketing.

The move is under way and will be phased over several weeks to help ensure a smooth transition to the new headquarters.

Contact us at: Retirement_Insights@JPMorgan.com

For questions about your personal retirement plan, contact J.P. Morgan Retirement Plan Services at 800-345-2345 or call your retirement plan provider.

Availability of products and services featured in Insights vary by plan. For details, contact your J.P. Morgan representative.

This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice.

All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on market conditions at time of the analysis and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not a guarantee of and may not be indicative of future results.

Certain underlying Funds of the Target Date Funds may have unique risks associated with investments in foreign/emerging market securities, and/or fixed income instruments. International investing involves increased risk and volatility due to currency exchange rate changes, political, social or economic instability, and accounting or other financial standards differences. Fixed income securities generally decline in price when interest rates rise. Real estate funds may be subject to a higher degree of market risk because of concentration in a specific industry, sector or geographical sector, including but not limited to, declines in the value of real estate, risk related to general and economic conditions, changes in the value of the underlying property owned by the trust and defaults by the borrower. The fund may invest in futures contracts and other derivatives. This may make the Fund more volatile. The gross expense ratio of the fund includes the estimated fees and expenses of the underlying funds. A fund of funds is normally best suited for long-term investors.

J.P. Morgan Retirement Plan Services LLC provides recordkeeping and administrative services to retirement plans. We also draw on the resources of other JPMorgan Chase & Co. affiliates in order to bring to our clients the products and services of a global financial services leader. J.P. Morgan Retirement Plan Services does not provide investment advisory or fiduciary services.

J.P. Morgan Asset Management provides investment management solutions and services, including separate accounts, commingled funds and mutual funds. J.P. Morgan Asset Management is the marketing name for the investment management businesses of JPMorgan Chase & Co. and its affiliates worldwide. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research and Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.

Publications referenced in this material are presented for general educational purposes only. JPMorgan and its affiliates did not receive any compensation or consideration for referencing these titles. The opinions and information presented in these titles do not necessarily reflect the opinions of JPMorgan Chase & Co. and its affiliates.

Diversification does not assure a profit nor does it protect against loss of principal. Diversification among investment options and asset classes may help to reduce overall volatility.

Neither JPMorgan Chase & Co. nor its subsidiaries or affiliates provide tax, legal, accounting and/or investment advice. Please consult your tax advisor or attorney for such guidance.

IRS Circular 230 Disclosure: This communication was written in connection with the potential promotion or marketing, to the extent permitted by applicable law, of the transaction(s) or matter(s) addressed herein by persons unaffiliated with JPMorgan Chase & Co. However, JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, to the extent this communication contains any discussion of tax matters, such communication is not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties. Any recipient of this communication should seek advice from an independent tax advisor based on the recipient's particular circumstances.